Date:03/07/2006 URL: http://www.thehindubusinessline.com/2006/07/03/stories/2006070303151400.htm

Back Case for deregulating S/B interest rates

M. Ramesh

Chennai , July 2

If interest rates are rising, don't you think you and I should get more interest on the balances in our operating bank accounts?

Four years after the then RBI Governor, Dr Bimal Jalan, declared that there was a case for deregulation of savings bank interest rates, the rates continue to be under RBI's control.

At the press conference that followed the RBI Governor, Dr Y.V. Reddy's annual monetary statement on April 18, this correspondent asked him a question: By keeping the SB rates under control, whom are you trying to protect — banks, or the deposit holders?

"I am protecting myself," Dr Reddy replied, laughing heartily. But the jocular answer did cue the helplessness of the Governor, which his more serious answer that followed confirmed. SB interest rates cannot be deregulated until the small savings rates (meaning rates offered for post office deposits) are brought down, Dr Reddy said.

The interpretation is, as long as the Post Office, with a higher rate of interest fixed by the government, competes with banks for a share of public deposits, banks will need to be compensated by not deregulating the SB rates.

Which means that the RBI is indeed protecting the banks to the detriment of depositors. Funnily enough, caught in the dilemma whether or not to deregulate SB interest rates, the RBI turned to the Indian Banks Association for recommendation. The IBA, fearing that deregulation would lead to a rate-war and a general rise in SB rates, has recommended status quo. But obviously IBA's recommendations will naturally be in favour of banks. Who will speak for deposit holders?

In 2005-06, total demand deposits with scheduled commercial banks increased 47 per cent to Rs 3,64,640 crore from Rs 2,48,028 crore in 2004-05. When bank Chairmen gloat over their declining cost of deposits, one should realise that their success is largely by pressurising the RBI to keep the SB rates regulated.

Banks are guilty of shortchanging their customers. They pay (the regulated) interest rate on the least balance in the savings account between 10th and 30th of each month, no matter how much money may have remained in the account during the period.

Suppose a customer has the Rs 1,000 in his account. He deposits Rs 1 lakh on the 11th of the month and withdraws the money on the 29th of the following month. The bank has enjoyed the Rs 1 lakh for 50 days. Yet it will pay 3 per cent on only the Rs 1,000 to the depositor. On the other hand, if a current account customer takes an overdraft, he is charged for the entire period of the loan!

How such a patently unfair treatment is allowed to continue is hard to fathom. Today, all interest rates except on savings bank, current account and export finance, are deregulated. The bank customer may gain if SB rates are freed.

Yet when it comes to taking a decision whom does the RBI ask for advice? The Indian Banks Association!